Statutory trusts recommeded to improve payments to sub contractors

Widespread adoption of the 'east coast' model for payment laws and greater use of statutory trusts are two propositions that have been put forward to improve the way payments are made to subcontractors in the building sector.

Presently, payments in the construction sector are on average 26.4 days late and the industry accounts for 20 per cent to 25 per cent of all insolvencies, according to federal government figures.

To assist in resolving this, John Murray's recent report, Review of security of payment laws: building trust and harmony, has outlined 86 recommendations to help improve subcontractors' ability to be properly paid by lead contractors. The government is currently consulting stakeholders about the report.

Under the east coast model, businesses that receive a progress payment claim are required to respond to it during the response period. If the builder does not respond, the claim can be considered a statutory debt and enforced. In contrast, in the west coast model there are no immediate consequences if a builder does not respond to a progress payment claim.

Presently, there is little harmonisation of security of payment laws around the country, and scant protection for subcontractors in the building sector when lead contractors become insolvent, Queensland being the exception. This state has a Subcontractors Charges Act 1974, which provides a statutory mechanism for subcontractors to collect payments from businesses higher up the food chain.

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell, says the vastly different state-based security of payment laws are confusing and costly.

"State building ministers along with Craig Laundy have a real obligation to look at the Murray report and come up with a consistent approach," she says. Craig Laundy is the federal Minister for Small and Family Business, the Workplace and Deregulation.

Carnell supports the report's recommendation statutory trusts be used in the construction industry for medium-sized to large-scale projects. One of the reasons is because at the moment very few subcontractors use existing payments laws as they believe they will be targeted and victimised if they do.

"Subbies come to us and say we haven't been paid, and we say why didn't you use security of payment legislation? They say anybody who goes down that path is likely to be black-banned."

Contractors mysteriously going into voluntary liquidation and phoenixing – when a business closes only to re-open with very similar directors and the same assets – are also problems in the building sector for subcontractors who have not been paid by a bigger business.

"We've got a case at the moment where a subcontractor used security of payments laws and got a direction that the contractor should pay him $140,000 and the business subsequenlty went into voluntary administration," she notes. Statutory trusts may help reduce incidences such as these.

Julian Troy, special counsel with Queensland law firm Thynne + Macartney's construction and infrastructure team has a different perspective. He points to the Queensland government's trial of project bank accounts for government projects as a new and potentially helpful mechanism to secure payment for subbies. But the Murray report rejected this idea in favour of statutory trusts. Troy also says harmonisation of state-based laws may do little to help subbies recover money owed to them.

"Uniformity of laws, although helpful, is likely to make little difference because most small businesses don't operate across states and, given the technical nature of the laws, most subbies require legal representation, particularly for larger, more complex claims," he notes.

Troy does support Murray's recommendation for more widespread adoption of payment claims identifying key information such as response times and consequences of not responding.

"An added benefit would be for lawyers involved to personally certify adjudication submissions and supporting documents. Payment disputes often come down to a battle of the facts and any steps that may help to tighten up the facts in dispute are welcome," he says.

Denita Wawn, CEO of Master Builders Australia (MBA), said in a statement the organisation is circumspect about the outcome of the report.

"Security of payment law assists in helping industry ensure businesses receive payment when due, however the various regimes have become more complex and divergent in recent years," Warn noted.

"Master Builders has long supported the goal of greater uniformity and consistency of security of payment law across the states and territories to increase industry understanding, clarify uncertainty, reduce complexity and boost payment compliance outcomes," she said.

Warn said the history of security of payment law shows more regulation does not always mean better outcomes, particularly for small subcontractors. She urged stakeholders to consider the report's 86 recommendations in a, "sensible and practical way".

"We will carefully consider the report and its recommendations following extensive consultation with our 32,000 members across the country. Naturally there will be a range of views given the existing differences from one jurisdiction to the next, and we hope the focus can be on finding common ground," Wawn said.

To further assist subcontractors to successfully chase payments owed to them, Carnell would like to see the introduction of a registration number for directors so they can be tracked from company to company.

"It's really hard to track directors. For instance, were I a director I could be registered in different companies' documents as Kate Carnell, Katherine Carnell, K Carnell or Anne Katherine Carnell. As this shows, it's hard to identify directors that have been involved in multiple companies that have failed. If we can identify directors, we can have a better look at what's happening at seriously crook operations," she says.

There's also a need for better systems to identify phoenix companies and businesses that have shadow directors.

Says Carnell: "This is an important area. We have heard some absolutely tragic stories from subbbies and state and federal governments need to be much more aware of this and more willing to act – because a chunk of the stories we've heard relate to government and defence force projects. We've got to hold companies and governments responsible for making sure these systems are good enough to ensure the little guys are not missing out.

"Over the next ten years there will be a huge amount of government infrastructure and construction projects. They have to take the lead in this fight and at this moment, they're not."

Alexandra Cain is a freelance journalist who has written for many leading Australian and international business publications